Europe’s troubles affect wide variety of U.S. firms

From manufacturers in the Midwest to upscale retail shops in Manhattan, a wide variety of American companies are feeling the pinch of Europe’s economic contraction, helping to hold back recovery in the United States.

Ford, the iconic U.S. car company, says that Europeans are not only buying fewer cars but also replacing fewer parts. Kraft Foods, which is behind such brands as Swedish Fish and Dentyne, says sales of candy and gum in Europe are lagging. And jeweler Tiffany & Co. says fewer European tourists are shopping at its flagship Fifth Avenue store.

Europe is suffering a financial crisis, fueled by dwindling investor confidence in the debts of such countries as Greece, Portugal, Spain and Italy and a beleaguered banking sector. In the United States, analysts are worried less about the financial system and more about the impact on companies outside Wall Street.

For companies in sectors such as food, apparel, hotels and technology, sales and profits will lag if the European crisis does not ease. The effect is direct, as Europeans buy fewer U.S. products and services, and indirect, as Europe’s crisis creates financial uncertainty in the United States and slows economic growth, leading American consumers and businesses to pull back, too.

“The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions,” Federal Reserve Chairman Ben S. Bernanke said Thursday.

The problems in Europe add to the reasons that big U.S. companies, despite record profitability, haven’t revved up domestic hiring enough to bring the unemployment rate below 8 percent. Other factors include the lingering wounds in the U.S. economy from the financial crisis and recession, as well as fears that the economy could dip back into recession if automatic tax hikes and sharp spending cuts take effect at year’s end.

The auto sector and its suppliers are among the most exposed to Europe’s problems.

“It’s a really, really tough environment,” Ford chief executive Alan Mulally said recently, comparing the auto business in Europe to conditions in the United States in 2008 and 2009, just before the auto bailout. “We’re not just seeing this on the new-vehicle side, but we’re seeing consumers, who are coming in for service, they’re not coming in as much and they’re not spending as much.”

American companies vulnerable to Europe’s slowdown have already begun to significantly roll back overhead. Staples, the Framingham, Mass., office-supply chain, reported lower sales, particularly of computers, in Europe this year and laid off hundreds of overseas employees.

“We expect trends in Europe to remain challenging,” Staples president Michael Miles said last month. “We’ll remain, and continue to be, consolidating business units, centralizing functions and reducing layers in complexity with an eye toward lower costs and better execution.”

Goodyear Tire & Rubber, based in Akron, Ohio, said that owners of consumer and commercial vehicles in Europe were buying fewer tires and dealers were selling out less frequently as a result.

In response, the company reduced production. “While the U.S. economy is showing signs of modest improvements,” Goodyear’s chief executive, Richard Kramer, said during a conference call, “we expect that other economies, such as Europe, will remain volatile. Now in that environment, we will continue to plan our business cautiously and do so with discipline, focusing on intense cost control and prioritizing cash and earnings.”

Precisely quantifying the effects of Europe’s problems on American companies and U.S. employees is impossible. When Europe’s economy slows, U.S. companies’ European operations are the first to suffer. Still, the spillover effects can be significant.

“As the uncertainty in Europe continues with the unemployment rate hitting 11 percent, that’s had a direct impact on stocks here in the U.S. That has a direct relation to a drop in consumer confidence in the past few months,” said Alec Gutierrez, an auto industry analyst at Kelley Blue Book. “It’s rather significant for the U.S. auto industry in that consumer confidence is highly correlated to consumer auto sales.”

There are other effects, too. U.S. companies with a major presence in Asia say they are facing new challenges because Europeans are importing less from Asian manufacturers.

3M, the Two Harbors, Minn., conglomerate that produces electronics components, reported earlier this spring that its European sales had fallen 6 percent “due to economic softness and ongoing austerity measures in many countries,” Chief Financial Officer David Meline said recently.

Growth in Asia, while strong, has been also affected because Chinese electronics manufacturers are exporting less to Europe. “Export to West Europe will probably not come back this year,” Inge Thulin, 3M’s chief operating officer, told analysts.

Broadly speaking, major U.S. companies sell 10 to 15 percent of their products and services to Europe, according to Tobias Lev­kovich, an analyst at Citigroup Global Markets.

Industries most likely to be affected include autos and components as well as materials and capital goods, the research showed. Food, pharmaceutical and personal products companies also have a large exposure to Europe, but consumers are less likely to skimp on these products.

Beyond the toll on exports, Europe’s problems are increasing volatility in the stock market, exacerbating the skittishness of American consumers and generating additional uncertainty for American firms about the pace of global economic growth.

And given the expectation that many European countries are in for long bouts of austerity, executives do not envision a rebound.

Last month, John Chambers, chief executive of networking
giant Cisco, said that not only was business in Europe getting worse, but customers around the world were also holding back on purchases while they wait to see what happens on the continent.

“I think people are in this uncertain environment and when they’re uncertain, unfortunately, you don’t spend,” he said. “Even the financial institutions outside of Europe are really focused on getting the profitability back in line. . . . So clearly, they’re keeping their powder dry.”

The effect on the U.S. financial system from an escalating crisis in Europe could yet be severe. But according to a Citigroup analysis, the largest U.S. banks, which have been reducing their exposure to Europe since 2010, have only $75 billion worth of assets tied to the euro zone, a tiny fraction of their emergency reserves.

One area of concern has been money-market funds, the multi­trillion-dollar industry that nearly imploded during the 2008 financial crisis. Small and large investors treat these funds as savings accounts that pay a slightly higher interest rate. The funds invest customers’ money in securities.

As recently as last year, money market funds had nearly a third of their assets in the euro zone, but that has fallen to about 14 percent, according to Fitch Ratings.

The effects are not uniform for U.S. companies operating in Europe, of course. While struggling countries in the south are a challenge, more robust economies in the north are performing well.

“To some degree, it’s also a tale of different parts of Europe. Southern Europe, where let’s just say proportionately more of the troubles are right now, [business is] actually down,” Michael DeWalt, a senior executive at the heavy-equipment manufacturer Caterpillar, said on a conference call. “Northern Europe, where the economies are doing better, it’s basically more than offset that.”

Still, throughout Europe, consumers are less likely to spend, reducing revenue for U.S. makers of both low­brow and high­brow products.

Europeans are skimping on candy and gum, Kraft Foods chief executive Irene Rosenfeld told analysts. “Unfortunately, this will likely continue, until the European economic environment recovers in key gum markets.”

But pricier alternatives to a pack of gum are also receiving less interest. Upscale retailers such as Ralph Lauren, Abercrombie & Fitch and Neiman Marcus have said Europeans are spending less — as tourists in the United States and in their home countries.

“The ongoing overhang of economic uncertainties in Europe . . . [is] weighing on the customer’s mind,” said Ralph Lauren President Roger Farah.

Zachary A. Goldfarb is policy editor at The Washington Post.
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